Buffett’s Bargain Shopping Spree

GRAHAM BOWLEY

Sunday

Feb 28, 2010 at 5:08 AM

Warren E. Buffett described using the last 18 months to scoop up a string of assets and strengthen his company.

America’s most famous investor, Warren E. Buffett, struck a confident note in his annual letter to the shareholders of his holding company on Saturday, as he described in characteristically colorful terms how his businesses had largely ridden out the calamity of the financial crisis.

The tone of the letter contrasted sharply with Mr. Buffett’s report last year, in which he took himself to task for the company’s decline in book value, only the second such decline since he took control in 1965. This time he described how he had used the last 18 months to scoop up a string of assets — a buying spree that culminated at the end of last year with the agreement to buy the Burlington Northern Santa Fe Railway, his biggest bet yet.

Mr. Buffett wrote that his company, Berkshire Hathaway, had net income of $8.1 billion last year, or about $5,200 a share, 61 percent higher than in 2008. The company also reported a 19.8 percent rise in book value.

The crisis of 2007-8 led to the company’s first operating loss in the first quarter of last year, raising questions about Mr. Buffett’s exposure to consumer spending and the housing market. The company recovered strongly later in the year, however, helped by the rebound in the stock market, which strengthened his derivatives holdings.

In his letter, which accompanied the company’s annual report, Mr. Buffett laid out in detail how many of his holdings still depended on the vagaries of housing demand and consumer spending. But shares of the company, which peaked late in 2007 around $148,220 and fell to lows of around $73,195, have since rallied to close at $119,800 on Friday.

“We’ve put a lot of money to work during the chaos of the last two years,” he wrote. “It’s been an ideal period for investors: A climate of fear is their best friend.”

Mr. Buffett used his letter to crack jokes and issue more of his trademark aphorisms. The so-called Sage of Omaha, he is America’s most listened-to investor, and his annual letter is watched closely by investors for his assessment of his businesses and of the economy.

It has, however, taken on somewhat less importance in recent years as Mr. Buffett, 79, has raised his profile with more public speaking and interviews.

In characteristically blunt terms, he had harsh words for unnamed chief executives and directors who oversaw disasters at their companies during the crisis but “still live in a grand style.”

He said, “They should pay a heavy price,” and that there must be a reform of the way executives are rewarded for their performance. “C.E.O.’s, and in many cases, directors, have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”

He also admitted mistakes of his own, saying he had closed a troubled credit card business, which had been his idea, and had given too much time to turn around the NetJets business, long a burden.

But he dwelt also on the lucrative positions he took in a string of companies over the last year and a half, pouring $15.5 billion into shares of companies like Goldman Sachs, General Electric and Wm. Wrigley Jr. Wishing he had taken greater advantage of the opportunities offered, he said, “When it’s raining gold, reach for a bucket, not a thimble.”

Burlington Northern Santa Fe was Mr. Buffett’s biggest purchase to date. Addressing that company’s 65,000 shareholders, he offered them a primer in his investment rules. But he warned all shareholders that the bigger size of Berkshire Hathaway would probably mean slower growth in the future.

“Huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge,” he said.

Justin Fuller, the author of a blog about Mr. Buffett and a principal at Midway Capital Research in Chicago, said this company size was an important theme of the letter: “There was a lot of talk about size and maintaining a business and how size and bureaucracy can really hurt a business over time.”

Mr. Fuller said Mr. Buffett had also given insights into his investing strategy — many of his businesses are now in monopoly or near-monopoly industries like railroads and utilities.

Mr. Buffett told a long story about the wisdom of using a company’s own shares to buy another company — which was a veiled criticism of Kraft’s takeover of Cadbury, Mr. Fuller said, but also a justification of Mr. Buffett’s decision to issue shares to buy Burlington Northern Santa Fe. Mr. Buffett is a major investor in Kraft but has opposed its pending acquisition of Cadbury.

Mr. Buffett’s letter is watched closely for hints about when he may retire, but this year’s offered none. Talking of a time when he would be long gone, he said he was still tap-dancing to work at the end of his eighth decade.

He said he had sold shares in ConocoPhillips, Moody’s, Procter & Gamble and Johnson & Johnson, mainly to finance his railroad purchase. The shares of these companies were still likely to trade higher, he said.

Closing the letter, Mr. Buffett, ever the cheeky salesman, invited shareholders to his company’s annual meeting on May 1 in Omaha — promising to play table tennis for spectators and urging them to buy goods and services from his companies, and ending, “P.S. Come by rail.”

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.